Sunday, August 20, 2017

It's a small thing, but you can depend on it

One more thing from Christopher Snyder's VOX article What economists study: A guide for the curious:
How is value determined? Scholars puzzled over this for a long time. Why are diamonds, mere decorations, so prized, while water, essential for human life, flows freely from public fountains? In the Middle Ages, philosophers advanced the just-price theory...

Today, economists generally believe that value is neither inherent, nor determined by a single factor, but is the result of the interaction of several impersonal market forces. We can explain the water-diamond paradox simply by drawing curves of supply and demand, as depicted in Figure 2. Seller behaviour is represented by the red supply curve. Its upward slope indicates that at higher prices, more is supplied as existing suppliers expand their operations and new suppliers are drawn into the market. Buyer behaviour is represented by the blue demand curve. Its downward slope indicates buyers are willing to purchase more at lower prices.

Figure 2 Market supply and demand

An equilibrium is reached where supply and demand intersect. At other points, either supply exceeds demand, leading price to fall as sellers accepted lower prices to offload their excess inventory, or demand exceeds supply, leading price to rise as buyers would still line up to buy at higher prices rather than do without the good. Equilibrium price P* determines the object’s value.

Note that the vertical axis shows "price". On a graph like this, the vertical axis always shows price. Price, or inflation, or wages. Always some measure of money, on the vertical scale.

Maybe they taught that the first day in Econ One, I dunno. If they did, I missed it. But if you don't know price is on the vertical axis, things they say about the graph won't make sense. Especially when they just talk about the graph and never actually show it.

So now we know.

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